Bitcoin: Thumbs Up or Thumbs Down?

THUMBS UP

Later this year, the 23,000 companies that use Fidelity to administer their retirement plans will be able to offer Bitcoint as as investment option.

“There is a need for a diverse set of products and investment solutions for our investors,” says a Fidelity spokesman. “We fully expect that cryptocurrency is going to shape the way future generations think about investing.”

THUMBS DOWN

Years ago, tech writer Glenn Fleishman thought cryptocurrency might be among the most exciting and important innovations in technology and finance. His thinking has since evolved to provisional cynicism.

"Cryptocurrency is on everyone’s lips,” he writes, "but it should be in no one’s virtual pockets. An overhyped form of imaginary value storage, it has all the disadvantages of cash, suffers from all the volatility of an overhyped penny stock, and consumes more power than a mid-sized European nation. Although it has been vaunted as untraceable, anonymous, and beyond the reach of governments, none of that is true. Law enforcement agencies have used cryptocurrency to take down crime rings, stop people from exchanging child sexual abuse material, and seize massive amounts of Bitcoin and other currencies."

Personally, I think NFTs are a speculative fad that possess useful features. Bitcoin is a speculative fad that ...?

Disaster Insurance for Billionaires

What will happen if the crazies take over and inflation goes hyper, turning dollars into pennies?  A few billionaires are worried enough to go long on bitcoin. Some choose other cryptocurrencies. Even if worst comes to worst, they figure, bitcoin and the like might be tradable for goods and services. 

Billionaires are ideal cryptocurrency investors – they can afford the risk. As for the rest of us, we do well to heed a warning issued on CNBC by Robert McCauley: Investing in crypto is worse than investing with Madoff.

McCauley's reasoning: Eventually Madoff’s victims have had most of their losses returned to them. If bitcoin bites the cosmic dust, there’ll be nothing left but unpaid electric bills. 

How Investment Advisers Became ‘Designated Drivers’

When the merely affluent seek investment help, their advisers generally call the shots. High-net-worth investors aren’t so easy to handle. Their peer group has told them what’s “hot,” and they want their advisers to get them in on the action. Result, an expanding category of alternative asset classes, including sneakers.

Bitcoin and other cryptocurrencies are the hottest of the hot. Many advisers dislike these unstable – and sometimes unserious –mediums of exchange, but they nevertheless have to yield to clients’ insistence: “OK, we’ll put one percent in bitcoin.” 

Even Jamie Dimon, CEO of JPMorgan Chase, finds he must curb his mistrust. His bank is launching a bitcoin fund.

 Dimon recently explained his dilemma to the House Financial Services Committee: "My own personal advice to people is: stay away from it. That does not mean the clients don't want it. This goes back to how you have to run a business. I don't smoke marijuana but if you make it nationally legal, I'm not going to stop our people from banking it.”

If the high-net-worth crowd is going to bet on crypto anyway, Dimon figures, at least JPMorgan advisers can help them do it without getting ripped off. They’re the designated drivers. 

Crypto Bungling, Crypto Greed, Crypto Fear

CNN's article on how a crypto exchange mistakenly doled out $5 million in Bitcoin carried this sidebar.

Choose one: Get rich quick? Get really, really poor?

Alas, Poor Bitcoin

Double, double, toil and trouble, 

Bitcoin bust and Blockchain bubble.

Remember when the value of a single bitcoin was expected to hit $100,000?  Nellie Bowles, the NY Times' intrepid California tech reporter, does.

Today the price of Bitcoin — $19,783 last December — is $3,810. Litecoin was $366 a coin; it’s now $30. Ethereum was $1,400 in January; today it’s $130.

*** 

The computing power needed to “mine” a Bitcoin or other cryptocurrency is now sometimes costing more than that coin is worth.

Blockchain, the technology developed to help manage Bitcoin, offers vast potential "to transform financial systems," Bowles writes. Inevitably, cockamamie blockchain ventures boiled up.

Even the word itself worked wonders. "When Long Island Iced Tea Company changed its name to Long Blockchain Company, its stock went up 500 percent in a day."

Beware the Crypto Jungle

Investment advisers win new clients by raising their hopes of becoming rich. Yet advisers perform their most valuable service when they save a client from becoming poor.

That service was never needed more than now, the age of cryptocurrencies.

Observers who couldn't believe their eyes when Bitcoin's value soared last year turned out to be right. Research suggests that only half the price rise was real – the rest was market manipulation.

Bitcoin mania spawned a swarm of entrepreneurs offering ideas, plausible or not, for cashing in on promise of blockchain. Steve Bannon, former White House adviser and Breitbart leader, reportedly has toyed with the idea of a new cryptocurrency called the "deplorable coin."

Four out of five initial coin offerings have been scams, according to one study. Why are people so eager to believe – and invest in – unlikely ventures? As The New York Times technology columnist observes concerning Bitcoin mania, it involves the willing suspension of disbelief:

[E]ven though the possibility of [Bitcoin] manipulation was mentioned often last year, it took months to put together detailed evidence that it had happened. 

And in that time, the whole world — the financial press, ordinary investors, anyone looking for the next windfall — put more money into Bitcoin. Even though lots of people should have known better — even though we all know the internet is lousy with scams — Bitcoin, we were told, was different. 

Nope, it wasn’t. Scams are everywhere online. Never let your guard down.

UK's First Bitcoin Heist: a Midsomer Mystery

Moulsford, Oxfordshire

The English village of Moulsford, the setting for several Midsomer Murders, just experienced the UK's first Bitcoin robbery. Four hooded men in black broke into a cyber-currency trader's house, tied up his wife, and forced him to transfer "a fortune in Bitcoin" to them.

The Thames Valley Police are investigating, although without the help of Detective Inspector Barnaby. 

The Guys Who Give Tulips a Bad Name

Christian Day, a professor at Syracuse University law school…has written about bubbles and panics. He said that comparing Bitcoin to the tulip craze was unfair to tulips…. 

            – John Schwartz in The New York Times

Those of us who find cryptocurrency mania difficult to fathom can learn from Nellie Bowles' fascinating sketches of the young guys who are busy creating cryptocurrency investment opportunities in San Francisco.  (Not that 20-somethings appear young in that milieu. See Bowles' earlier magazine piece on the city's teenage techies.)

Worried that clients will lose their shirts on Bitcoin or alternative cryptocurrencies? Then suggest they buy a sweater for emergency use. Hodlmoon.com will provide one stitched with the logo of whatever cryptocoinage they're betting on.

Don't Like the Parrot? How About Bitcoin?

Eager investors are getting rich quick with Bitcoin. But  Bitcoin reminds an Economist blogger of  a certain parrot. A real live currency it ain't.

It seems that every day, Bitcoin seems to hit a new high. But the reported price can move up and down by $1,000 or so within a few hours. This might have made it a great investment for those who got in at the right price and are nimble enough to get out in time. But it doesn't make it a useful means of exchange. When the price is rising fast, those who use bitcoin will be reluctant to part with it; when the price falls, those who sell goods will be reluctant to accept it.

If It Smells Like a Tulip . . .

This year…

The value of Bitcoin has increased by more than 600 percent.

One hundred hedge funds have been set up to invest exclusively in Bitcoin.

And as of the end of last month, nearly a third of Bill Miller's hedge fund was said to be invested in Bitcoin.

Nathaniel Popper of the Times provides a lucid introduction to this year's steaming hot investment.

“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank," says one trader. But that appears to be a minority worry. Almost everybody frets about a possible collapse of stock prices. Almost nobody, aside from grumps like JPMorganChase's Jamie Dimon, seems to think that Bitcoin will wilt in the heat of irrational exuberance.

Bitcoin 2.0: the End of Stock Exchanges?

Whether Bitcoin has a bright future as money is debatable, but perhaps that's beside the point. Maybe the point is innovations such as Medici:

Patrick Byrne, the CEO of Overstock.com and would-be financial revolutionary …wants to use the technology behind Bitcoin to create a securities market that exists not in any one particular place, but as a collection of data distributed across computers anywhere on Earth, with no need for the DTCC, the New York Stock Exchange or any of the other middlemen who oversee the world’s capital markets.

This new system, which he calls Medici, after the banking family that ruled over Renaissance-era Florence, would do something no other stock exchange has ever done. It would skip the centralized clearinghouse entirely, and keep track of trading, clearance, and ownership on everyone’s computers at once. It would transform processes that now depend on centralized institutions for trust, and let people instead transact directly with one another.

Why is Bitcoin's success as a money substitute debatable? Matt O'Brien at Wonkblog believes the cryptocurrency is perceived as too good a store of value:

Bitcoin's finite supply means that its price should go up, and keep going up. So if you have dollars that are losing a little value to inflation every year and Bitcoins that are gaining it, which one are you going to use to buy things with? The question answers itself, and it raises another. Why would this ever change? *** Buying things with Bitcoin would be like cashing out your Apple stock in 1978 to go grocery shopping even though you have plenty of actual cash lying around.

Once upon a time, stockholders felt safe from fraud because they possessed actual stock certificates. Then most certificates moved into depositories. Now they've largely vanished. Will investors be willing to take the next step, into cryptostocks?